Ford’s exit spells the end of the road for manufacturing

“You’ll never see Japanese cars in an RSL car park.” That was Bill Bourke, Ford Australia’s sales supremo of the ’60s. Bourke was wrong. Dead wrong. In 2016, Ford will cease manufacturing in Australia…

Ford’s impending shutdown of its car-making plants in Australia does not bode well for an already ailing manufacturing sector.
AAP

“You’ll never see Japanese cars in an RSL car park.”

That was Bill Bourke, Ford Australia’s sales supremo of the ’60s.

Bourke was wrong. Dead wrong.

In 2016, Ford will cease manufacturing in Australia. The company, headquartered in Broadmeadows, Victoria, has lost $600 million over the past five years. Neither sales nor subsidies can justify continuing its domestic manufacturing operations in Australia.

Gone are the days when Ford could build legendary sports sedans, like the Falcon GTHO Phase III. In 1971, it was the fastest four-door saloon in the world.

Fans of this era cite Holden and Chrysler’s supercars as well: the Monaro 350; the Torana L34 and A9X; and Chrysler’s E38 and E49 Chargers.

But nostalgia isn’t what it used to be.

The heyday of Ford and Holden’s domination of Australian motor industry are long gone. In the 1980s, Japanese firms, such as Toyota, completed their long march to the top of the Australian car sales charts.

By the 2000s, South Korean brands, such as Hyundai, also began to dominate as imported car sales outstripped locally-produced models.

Consumers changed. Tastes changed. With a plethora of 4WD and SUV imports to choose from, as well as high-quality, economical four and six-cylinder cars from Japan, Korea and Europe, by 2012, Australian consumers could choose from up to 500 models from 50 different brands.

Ford arrived late with the local manufacture of the 4WD Territory, which has been a modest sales success, particularly the diesel variant. The petrol model employs Falcon’s six-cylinder engine.

But Territory sales couldn’t offset the disastrous plummet in Falcon sales, which has been the mainstay of Ford’s range since the 1960s. Corporate fleet and government sales, which account for two thirds of large, local car sales in Australia, are insufficient to meet the volumes required to keep products like Falcon profitable and viable.

The news is devastating for 1200 Ford workers, with over 600 employees in Geelong and more than 500 in Broadmeadows, losing their jobs by October 2016. Previously, in July 2012, Ford announced 440 redundancies (although, ultimately 100 were redeployed) as Falcon sales continued to sink.

In Geelong, the news comes on the back of Shell’s announcement in April this year that it would sell its Geelong refinery. The move threatens 450 jobs, plus hundreds more who have contracts with the Shell operation.

Long history

The company’s departure also represents the end of 90 years of Ford manufacturing in Australia, going back to Henry Ford I’s Model T.

From the 1960s, like Holden, Ford counted on sheltering behind the high tariff walls that rendered imported vehicles less competitive. They depended on Australians buying their luxury car derivatives, the Ford Fairlane and LTD and the Holden Statesman, instead of imported BMWs, Mercedes-Benzes and Jaguars. Tariffs and taxes meant German cars cost twice as much in Melbourne as in Munich. Even more modest German imports, like VW’s Golf, cost more than an average Australian car.

That’s still true today, despite the slashing of tariffs. As a little exercise, look at the retail price of a 2013 BMW 750i. About $281,000. Right? Now look at the US price: about $85,000.

Despite the tariffs and the luxury car taxes, Australians buy plenty of BMWs, Lexus-es and Toyota Landcruisers. The biggest-selling car in Australia in February 2013 was the Mazda 3 (somewhat ironically, Ford had effective day-to-day control of Mazda until 2008, via a large minority holding, although the company owns only 3% of Mazda now).

Like everyone else, Australians are car snobs. Like Alec Baldwin’s character in 30 Rock, they wouldn’t be seen dead in an American car.

Small wonder Falcon is dead and Commodore is on the endangered species list. Nobody buys cars out of patriotism anymore — not even RSL members.

Endgame: cost versus scale

Two basic economic propositions underscore Ford’s decision to withdraw from manufacturing in Australia: returns to scale; and factor costs.

At the peak of Falcon and Holden Commodore production, the local manufacturers could count on 100,000 sales annually. But with the Falcon counting only around 14,000 units annually, its continued production does not justify the enormous R&D expenditure (supported only to a relatively small degree by subsidies) required to develop a new model, which would also need to comply with forthcoming emissions standards.

There’s the rub. One of the core reasons for Ford’s decision to wield the axe is Australia’s adoption of the Euro 5 vehicle emissions standard, which will come into effect in November 2013. The more stringent Euro 6 standard, which Australia has also adopted, will be implemented by mid-2018.

Euro 5 would have required major re-engineering of Ford’s six-cylinder engine, which would be costly and an unviable proposition, given Falcon sales have fallen by around 75% over the last few years.

Sales have not been not helped by the four-cylinder EcoBoost Falcon, which received $230 million in government subsidies and has proven a sales failure, with few consumer or government orders.

The other contributor to Ford’s decision to shut down local production is cost. Ford Australia’s CEO, Bob Graziano, noted that it cost twice as much to build a Ford in Australia as it does in Europe. And Australian production costs four times as much as building a Ford in Asia.

Do the maths: Lousy scale x escalating costs = shutdown

The loss of 1,200 jobs in Broadmeadows and Geelong is only the tip of the iceberg. Victoria, the manufacturing hub of the country, is in recession. The high Australian dollar is killing the manufacturing sector. Sectors of the farm industry are in huge trouble. Much of the world economy is in an extended state of recession and austerity.

If the mining super-profits boom has plateaued or, worse, disappeared, as some pundits have predicted, then Australia is in for a long winter of discontent.

Neither side of politics has any solution to these problems. Future Australian governments face a hollowed-out manufacturing sector, declining revenues from resources and an ageing farm population facing import competition as never before.

Australia rode out the GFC on the back of virtually unprecedented mining boom and a fiscal revenue position that was Made in China. But that was a thin, glossy veneer on what was – and is – in reality a deficit-ridden, Dutch-diseased, debt-financed bubble.

Shell is selling the Geelong refinery. BAE Systems is getting out of Australia. Ford will be gone in 2016.